By: Dr. Mike Campbell

Ratings agency Standards and Poor’s have poured more fuel on the sovereign debt crisis in Europe by a further downgrade of Greece’s credit rating. S and P has dropped Greece’s rating by a further three notches to CCC making it the worst credit “risk” of all of the world’s developed nations. Standard and Poor’s have taken the view that any “re-profiling” of Greece’s debt obligations would be regarded as a default since investors would be likely to receive less from their investments than anticipated (a safe bet, since that would be the purpose of the move). In these terms, S and P is predicting that Greece will default at least once before 2013. Obviously, any default, even a “technical” default in a Eurozone country is likely to send shockwaves through financial markets and could lead to a depreciation of the Euro.

However, despite the Cassandra sayings of the ratings agencies, investors seem to be taking a broadly bullish stance on the long-term strength of the Euro. Each new chapter of the saga is met by an initial dip in the value of the Euro, but the position has usually reversed after just a few weeks.

The Greek authorities are understandably furious over the S and P move. In a statement, the Greek Ministry of Finance said, "The decision ignores the intense consultations taking place currently between the same institutions and the IMF aimed at designing a viable solution that will cover the financing needs of Greece in the coming years."

It is becoming increasingly clear that Greece will need further assistance to overcome its €340 billion debt problem. This may involve some reduction in the returns that investors can expect, but any investment (even an AAA rated bond) carries a downside risk. There is no inherent reason why losses should not be passed on to investors, but a nation state is not quite the same as “any other company” and the ramifications of any default – even a technical one – will need to be clearly thought through.